The big U.S. banks are considering defying the Fed and announcing capital return plans shortly...

The big U.S. banks are considering defying the Fed and announcing capital return plans shortly after stress tests are released this afternoon, reports Bloomberg. The Fed wants the lenders to wait another week, but bank lawyers worry the plans will leak out. It's under discussion, JPM CFO Lake told an investor conference (transcript) Tuesday. XLF +0.6%.

The banks need to stay solvent. The idea behind a stress test is to be sure that banks have adequate capital to survive unexpected shocks. Returning that capital to shareholders would not result in a feedback cycle that helps the banks' solvency risk. Really ridiculous how quickly the industry forgets about being bailed out.

A small capital return is not going to affect solvency risk for most of the banks, banks are on stronger financial ground than most people seem to think. U.S. banks are certainly better off than European banks, I'd argue that they are also better off than Chinese banks as well.

Lets face it there are socialists here that believe they should only be a pass through from the Federal government and not make any profit at all. They believe the shareholders are evil people who want to gouge money out of helpless homeowners who have to pay interest to own a home.

To me the gov't should put in place policy and the banks should work within that framework. As long as they are working within that framework they should have no further restrictions on how they manage their shareholders and capital structure.

Tom, shareholders of BAC had been starved of some decent dividend for a long while, so isn't it proper and appropriate to reward shareholders to some extent with a decent return, just as the execs are rewarding themselves with obscene payouts? Nobody expects nor is asking for BAC to empty its coffers for shareholders but I'm sure there's enough for some measure of rewards and I'll be damned if I let anyone say differently. All shareholders are hungry for some decent return and it's also good for BAC share price if payout has improved.

I appreciate the needs and concerns of shareholders, but if you are a long term investor you need to ask yourself if this is even a good idea?

Yes, you are returned capital, and yes I think that banks HAVE DONE and ARE DOING much better executing their business in what has turned into a solid credit cycle. But this is the point -- sensitivity testing the turns and the need for additional capital buffers falls more into the Fed's area of expertise, and if their stress tests advise against it, I am inclined to believe them. I am confident that no one on the committee wants to face another crisis, and no one at the banks should either. Things are structurally no different than the time preceding the last crisis. Way too early to leverage their capital in this manner.

These are just my two cents. I do tend to be a bit of a dividend hawk.

The Fed hasnt even announced results from the stress test yet, so how can you make the case that the capital returns the Fed may or may not allow are or are not the appropriate level?

The banks are much better capitalized than they were in 2007, and there are fewer bad actors. I don't expect the Fed to allow banks like Citi and BofA to jump right to returning 50% of excess cash to shareholders, but certainly they can deploy more than they currently are.

I agree. There was article on Forbes I think recently pointing out If banks like JPM had to, today, report all the leveraged risks they are very much exposed to on their books like mot companies must their reports would look far different than they do. Capital doesn't necessarily mean assets, I can borrow $1M put in the bank and call it capital then leverage that etc. Banks have to pay all that free money they borrow at the Fed window back to the Fed. and they have borrowed lots of it

"Lets face it there are socialists here that believe they should only be a pass through from the Federal government and not make any profit at all. They believe the shareholders are evil people who want to gouge money out of helpless homeowners who have to pay interest to own a home. "

So true the above bears repeat. Even if banks were a government "pass-through" there would be the government overhead that either the tax payer or the borrower would need to pay or US Banks would eventually become like Greece Banks.

It is so darn difficult for non-investing people to understand that the interest rate on money saved in a bank is like gravity on the water vapor of a heavy cloud. It causes the rain to fall in the latter and money to be lent in the former. It allows the young to borrow for education, the old to invest for retirement and those in between to buy homes, start business and have children. It's what makes an economy and a civilization instead of a barter-system Third World hell hole that we see so often on the news.

Very interesting take...Tom. Thanks for educating me. Need to go back to being unbiased, as I used to be. But it's hard to do so, where BAC is concerned, as many of us have lost the shirts on our backs from past misdeeds, so we do deserve some reward when they can afford it, which obviously they can , since they're paying their execs obscene payouts. All we're asking is to have more peanuts.....which can't be difficult, if they've got heart!!

Amen....you can lay the past problems of the banks at the feet of people like Barney Frank and Chris Dodd. Bad loans, mortgages that should never have been granted and similar actions -- most pressured by do-good politicians who believed that EVERYONE should own a house, regardless of the ability to pay for it -- these are what knocked the banks down. Unfortunately, some banks are again granting mortgages to those with questionable ability to pay and far too small down payments. On the other hand, the return of capital to stockholders has never done anything to undermine the banks and their stability.

Helping poor owners buy houses doesn't pay. That's the lesson learned and the bashers here want to make sure they never make the same mistake again by denying any profit in future transactions. Let them pay rent!

They need to consider that its the people who stopped paying their mortgages that caused the financial crisis.

I'm with you. There are something like 28 federal agencies that have some regulatory say over the home mortgage business (but there is absolutely no fat in the federal budget!) Suffice to say that perhaps if even half of them had been performing their responsibilities as stipulated by federal law instead of hiding behind Standard & Poor's pronouncements the crisis would have been much less severe. The meter hasn't been invented that could measure the hypocrisy of those federal agencies since the fall of 2008.

I would never assert the banks were blameless in the affair. But to lay the entire mess at their "grubby, greedy" feet is just flat wrong.

Just follow the money and see who got paid, not the homeowners who got foreclosed on specially if they lost their jobs, not the 25% of mortgages underwater today, the people who got paid in full were the ones who aggressively promoted em and got paid in full on both ends. They like to call it "too big too fail"

the seeds of the 2008 financial crisis were sown many years prior with the enactment of the community reinvestment act. the banks have learned their lessons well. it is now time for the shareholders to be rewarded.

" I appreciate the needs and concerns of shareholders, but if you are a long term investor you need to ask yourself if this is even a good idea?"Tom, the -only- thing that makes financial shareholders constantly wonder 'if this is even a good idea' is concern about the guvm't and their endless actions. Else, given the number of your responses that show a healthy interest in the markets, it should take you seconds to see that the industry is healthy. Pre-disposed, sir?

ONE bank needed guvm't help, and like all things guvm't, it snowballed into recklessness and reactionary. Thankfully, that snowball is finally slowing and getting the needed review it avoided during the guvm't 'panic'.

Had the guvm't simply offered TARP to those that 'needed' it and 'spun' it positively in the press, markets woulda' shaken everything out just fine, thank you. The alternative was basically stating that the system HAD collapsed, but not to worry, your guvm't will fix you.Followed voraciously by a headline seeking press. Yecch.aka hoist by his own petard..

I am certainly enough a free market proponent, I think, but you must offer credence to the fact that SOME gov't regulations are necessary. And especially in the post-TARP era this seems well within the Federal Reserve's jurisdiction.

To think that the subprime securitization blow up was a one-institution isolated event is way off in my opinion. Sure, maybe the number of banks absorbed or in need of money was limited, but there were many players culpable on the loan origination side. The MBS' or whatever bad collateral could be anyone's burden, and with the information asymmetries around these securities, the Fed's macro-level auditing is absolutely necessary. In fact, I doubt it is even stringent enough. Realize that I've tried to create a derivatives market around this belief, it is dormant.

This is not to say that I am not bullish on banks or real estate at the current levels. Read my articles, I am. But I don't think capital disbursements should even be in the discussion until tail risk is completely off the table.

I am not arguing that all of the 'reforms' need repeal, only that they were hastily assembled, are in dire need of review, and that the guvm't specifying -further- what consistently profitable institutions may be allowed to do with their profits (already hampered by guvm't involvement) serves neither the institutions nor the guvm't.

The forced withholding of normal dividends has hurt the industry so the weak can recover relatively invisibly. Common wisdom is that due to this guvm't control, all banks are healthier now, but there is no alternative view discussed - how healthy would the banks that continued to thrive through the guvm't fueled crisis be, had they not been forced into Least Common Denominator-ville.

One institution got hit from every angle that you describe and arguably caused the term 'Too Big To Fail' to enter the lexicon. TARP, as well. 'Post TARP', referring to period of time that TARP created, speaks volumes (IF your institution takes TARP, you MUST spin on one toe daintily until further notice - that is the price you pay for getting a bailout from the taxpayer. OH, incidentally, you MUST accept TARP and may not speak publicly about it).

The loan-origination-side problems were in reaction to the ninja guidelines enacted by the guvm't. I cannot agree that they will prove more reliable in oversight, post ninja, as I don't see them owning up to that issue in any public way.

Macro-level auditing has always been and will be a way of life for the banking industry, as it must. The fact that the oversight failed to recognize the coming meltdown must rest with the regulatory agencies. Their internal debates, and the Repercussions of that guvm't self-audit, are the necessary and painful result of that failure, but 'controlling' dividends to force behavior that is contrary to free-market, for this long, is only intrusive.

Clearly, I believe 'tail-risk' IS off the table in most cases, and so I believe that blanket regulation and intrusive control hurt the industry in order to protect the least deserving. IMO, that must cease.

I can see some of your points, on some our views don't differ much, on others I disagree.

The financial reform legislation was so vague that it, for all intents and purposes, didn't pass....

I agree with your notion about "blanket" regulation, agree with freedoms, just disgusted by the gall of the banks that they would consider it. Good banks took TARP money because it was cheap money, and could understand their gripe to an extent. But they still work WITHIN monetary system that needs to be somehow centrally governed. After all you don't have JPMorgan Notes in your wallet.

Tail risk is tail risk...unknown unknowns...I do think the tail has gotten shallower, but has it gotten shorter or disappered? I very much doubt it.

I'm sorry Tom, I must patently disagree with this or any statement that continues the 'bailout' moral line, so popular in some press. I spent unnecessary words in my reply to humorously define my conclusions regarding TARP. Anyone now removed from possible Fed blackmail has stated categorically what happened that fine day - my hero Dick Kovacevich is possibly the most famous for saying so, but there are many others, and the story doesn't change.

TARP may have been well-intentioned, but it is a smear the financial industry will carry for years to come. Press loves to beat anything when it is down, saving special venom for easily pointed, impossible to refute 'fatcats'. It was never easy, from a publicity perspective, to thrive in this industry - the Fed basically added reckless disregard to that assumption pool by making it illegal to even discuss the terms of TARP publicly.

Apologies to anyone not interested in this conversation, but I am compelled to battle the TARP dogma. b well, Tom.